In the world of commercial property, a contender for ‘term’ of the year this year would be ESG (Environmental, Social, Governance). The impact of our businesses on the world around us – whether it be in terms of the environment, our impact on the society and communities in which we operate, or just in the way that we run our businesses has never been more important. Not only in terms of doing ‘what is right’, but also when it comes to attracting and retaining new customers and investors to your business.
This ESG principle also extends to commercial property. Whether you are a landlord, commercial property owner, or tenant, in the world that we live in today, ESG is playing an ever-increasing role. It is important in who you are renting your commercial property to, who you are renting it from, and the way that your business uses the property.
What is ESG?
As stated above, ESG stands for Environmental, Social, Governance. It should be integrated into a business’s culture and strategy as this is certainly an aspect that everyone from customers to investors will be looking at when they judge your business.
Environmental
The term ‘Environmental’ refers to what the business is doing to help the environment – in short, improve sustainability and help to reduce your impact on the environment. This can range from using renewable energy sources to cutting down on the number of disposable cups that your business uses.
The ‘Environmental’ aspect of ESG is down to every business, as such – both the tenant and the landlord. Landlords might be responsible for ensuring that the commercial property is well-insulated or has an up-to-date heating system, whereas the tenant would be responsible for ensuring that they are recycling as much of their waste as possible or reducing the amount of paper that they use.
There may also be some aspects where both the commercial landlord and their tenant(s) come to an agreement about each of their responsibilities.
Social
The social concerns that are covered in ESG refer to aspects such as human rights, diversity, the protection of consumers, communities, and animal welfare. The social aspects of a business are linked to its impact on people within and around it, how it works within society and ensuring that people are treated fairly, humanely, and within the law.
Most of the social aspects of ESG are the responsibility of the business, but there could be elements that are down to the landlord – ensuring that their commercial property is accessible and meets health and safety standards, for example.
Governance
‘Governance’ in business refers generally to the way that it is managed and adherence to the rules and laws that the business is required to abide by. It is about transparency, how the ‘E’ and ‘S’ are managed, and workers’ rights.
Generally speaking, governance is down to individual businesses. It is, after all, up to the management of a company to manage and govern itself in the way that they want to.
With all of this in mind, it seems as if the areas of responsibility for ESG are fairly well-defined. Things are, however, beginning to change.
ESG Responsibility
Due to the importance of ESG for businesses (and the world), we are now beginning to see commercial property landlords stipulating certain aspects in their tenancy agreements. We are seeing increased cases of landlords looking for evidence of their tenants’ ESG standards for them to use to base their decision on who they are going to rent to.
In addition to this, we are also seeing more and more landlords adding clauses to their contracts with commercial property tenants. Some examples of this could include stipulating how a tenant deals with their waste, or perhaps asking them to prove that they have fair employment policies for their staff.
As the general public increasingly looks to understand the ESG credentials of the businesses that they spend their money with, they are also looking a step further – and also looking at the businesses that these businesses work with. And this is one of the main reasons why commercial property landlords are looking to ensure that the businesses that they deal with are doing the ‘right’ thing.
This can be a dangerous path to go down, however, when it comes to smaller businesses maintaining autonomy over themselves. Different businesses will react differently, according to the degree of control that they believe they are losing, and this has the potential to introduce a ‘tiered’ system into the achievement of commercial property procurement.
The question of how far commercial property landlords can go in the stipulation of certain ESG elements is an important one.
In many circumstances, conversation and collaboration are key to coming to an understanding that works for everybody. So, with this in mind, we have come up with a few ideas of how commercial landlords and tenants can work together to improve everybody’s ESG credentials.
Working Together – The Perfect Solution!
It is important for commercial property landlords to enable their tenants to boost their ESG. Providing the carrot, and not the stick, so to speak.
Some ideas that we have come up with, include:
Energy
Ensuring that as much energy as possible comes from renewable sources – albeit solar panels or wind turbines, to choosing ‘greener’ energy companies who also use ‘green’ energy sources. This could also include ensuring that the building is insulated as well as possible, and, in the case of businesses that generate a lot of heat (data centres or those with substantial server rooms, for example) any energy is put back into the grid/business.
Depending on who is responsible for lighting, air-conditioning, or heating systems, ensuring that low-energy lightbulbs are used as well as the most energy-efficient systems installed.
Health and Safety and Accessibility
Ensuring that the property enables the staff who are working within the commercial property are safe and able to work properly. This includes everything from having adequate lighting and ventilation to being wheelchair accessible, displaying proper signage, and ensuring enough car parking spaces.
Final Thoughts
The reality is that ESG is playing an ever-increasingly important role in business around the world. It might, therefore, seem like common sense that commercial property landlords are looking to add elements of this into contract negotiations. However, we would argue that a way that is less likely to affect small businesses (as well as those all-important tenant reviews) would be for commercial property landlords to encourage their tenants to improve their ESG credentials by putting enabling measures in place and encouraging them to use them.
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